If you’re a business owner, or you complete a self-assessment tax return, there are some important changes coming to the way you submit your information.
As part of the government’s plans to help individuals and businesses keep on top of their affairs, the Treasury has announced major changes to the way the tax system works. According to figures from consumer information site Which?, this move could affect up to 4.2 million self-employed people.
If you’re a self-assessment taxpayer, read on to find out four important things you need to know about how the new ‘Making Tax Digital’ (MTD) plan could affect you.
1. You’ll have to send quarterly updates to HMRC instead of once annually
To put it simply, the Treasury intends that MTD will replace the current self-assessment system. With this new system you will have to keep digital records of your business’s accounts, rather than physical ones.
Of course, you’ll also have to use approved software for your record keeping. If you aren’t sure which type to use, you can check the government website for a comprehensive list of your options.
In this new system, you will have to send a quarterly summary of your activities to HMRC and in return you’ll receive an estimate of how much tax is due. Of course, you won’t actually have to pay this until 31 January of the following calendar year.
If you don’t sign up to MTD in time, you could face penalties so it’s important to bear this risk in mind.
2. If you self-assess your taxes and earn more than £10,000, you’ll have to sign up
Essentially, if you self-assess, and have business or property turnover or gross annual income of more than £10,000, then you’ll have to sign up for this new scheme before 6 April 2023.
It’s important to bear in mind that this doesn’t just include any earnings from your job, but also income from investments that you hold, such as rent from a buy-to-let property. This includes both domestic and foreign earnings.
Furthermore, if you live abroad then you will only need to use MTD to declare the income you make in the UK. Finally, if you start earning an income as a sole trader or landlord on or before 6 April 2023, you will not have to join the scheme until you’ve filed your first self-assessment tax form.
3. MTD will enable you to budget more effectively
While this is a major change for HMRC, the government hopes that this new system of digital record keeping will have huge benefits.
For a start, since you’ll submit your tax information more regularly, it can give you a better idea of how much tax you owe, so you can budget more effectively. This will make it easier for the owners of small businesses to manage their expenses.
Furthermore, HMRC hopes that this new system will reduce the amount of mistakes that people make, making it easier for the government to collect what it is due.
While a small mistake by itself may not be a huge deal, when too many people make them this can quickly add up to become one. Each year, there is a substantial “tax gap”, which is essentially a shortfall between the amount that HMRC expected to be paid, and the amount business owners actually paid in tax.
According to figures published by Which?, the most recent figures for the 2019/20 tax show a tax gap of £34.8 billion. This is a huge sum of money, which is why the government hopes that this new innovation will help them to close the gap and enable HMRC to manage their finances more effectively.
The government first launched the MTD initiative in 2019 for businesses that pay VAT and have an annual turnover of more than £85,000. This year, the net is being widened to include all VAT-registered companies.
Furthermore, it was meant to be launched for individuals’ Income Tax in 2023, but the disruption caused by the coronavirus pandemic has forced the government to delay it. Larger companies that pay Corporation Tax will also eventually have to join MTD, although not until at least 2026.
4. Your deadlines for settling tax affairs will remain the same
While this initiative may seem like a big change, it’s important to remember that many important dates and facets of your annual taxes will stay the same. For example, the deadline for finalising your tax affairs and making any balancing payments will remain as 31 January, so keep that date in your diary!
Furthermore, if you pay tax by payments on account, your deadlines will remain 31 January and 31 July.
You’ll also still have to keep your relevant business records, such as receipts, invoices, bank statements, and any other evidence that can back up the information you’ve submitted.
Of course, if you want to ensure that your business has all the proper documentation, working with a financial planner can help you to keep thorough and accurate records. This can save you a huge amount of stress if HMRC ever investigate your tax liability.
Get in touch
If you want to get your business’s affairs in order in time to sign up to MTD, we can help. Email hello@sovereign-ifa.co.uk or call 01454 416653.
Please note:
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.